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State Budget Cuts: Across the Board, and At Cross-Purposes

When California furloughed more than 200,000 state workers recently, the personnel move was supposed to save the state $1.7 billion over 17 months. But the actual savings will pencil out quite a bit less than that, once all the unintended consequences are totaled. The furloughs might even end up costing California money in the long run.

For example, 5,300 employees of the Franchise Tax Board have been told to take three days off work each month rather than spending that time auditing delinquent taxpayers and collecting back taxes. For every dollar it has saved by furloughing these workers, the state has lost $7.15 in uncollected revenue, according to a report by the California Senate Office of Oversight and Outcomes. The decision to keep these workers off the job could reduce the overall projected savings of the furlough program by more than one-quarter, according to the report.

Elsewhere in the state bureaucracy, there were more unseen traps for the furloughs to fall into. At state prisons and hospitals, facilities that must be fully staffed 24 hours a day, workers haven't been able to take the time off. As a result, they have accumulated large reserves of leave time. According to an audit of the Department of Corrections, paying for unused leave time — much of which is a direct result of the furlough program — will eventually cost the state somewhere between $546 million and $1 billion. The final number depends on whether workers are paid out for the leave when they quit or retire, or are able to use the leave while employed by the state. What's more, unions have brought some 20 court cases against the state, arguing that the furloughs are unconstitutional. If some of those cases break the unions' way, California may be on the hook for billions of dollars of back pay and interest.

Across the country, states were forced to make massive budget cuts in 2010, in order to balance budgets that have been running historic deficits. Collectively, the states' deficits came in at $174 billion last year; the National Conference of State Legislatures estimates the collective budget gap for 2011 at $89 billion. The cuts included a lot of blunt, across-the-board tactics like California's furloughs because they could be implemented quickly. "We tend to choose the path of least resistance," says California Legislative Analyst Mac Taylor. "We go in and do the higher-level stuff like furloughs and across-the-board reductions that affect everyone equally. That spreads out the pain and is easier for legislators to sign on to than targeting individual programs."

But core programs have been cut, as well — quite deeply in many states. The pain has reached nearly every corner of government, including higher education, >corrections, K-12 education and Medicaid reimbursement rates to providers — anything states can slash without jeopardizing their eligibility for federal stimulus funding. And more cuts may be imminent, especially for the 30 states that balanced their books in anticipation of $24 billion in additional federal Medicaid assistance that appears increasingly tenuous. "If we don't receive this money, I think you are going to see additional cuts in reimbursement rates and more layoffs," says Raymond Scheppach, executive director of the National Governors Association. "One is going to hurt access to health care and the other will be a drag on the ability of the economy to respond."

Press "reset"

For all the quick-and-dirty cuts states have had to make, a few have tried taking a step back from the crisis and making more deliberate changes to the cost and structure of government. In Georgia, Michigan and Vermont, there's been talk of overhauling, or "resetting" state government by cutting back on generous pensions, sharing administrative services and consolidating the number and function of agencies. The problem is, those sorts of changes take a long time to build support around — more time than the states have right now.

For example, Louisiana passed a law last year creating a commission tasked with recommending ways to streamline government. Although the commission only got going last August, the Legislature wanted recommendations by the time its 2010 session began in January. While the commission came up with 285 recommendations, only a few of them made it through the legislative process this year, including one bill aimed at consolidating local state offices to save money on facilities. "If you really want to change state government fundamentally," says state Senator Jack Donahue, chairman of the commission, "it's going to take more than four months."

In Missouri, the state Senate took a day off from its work in March to break out into small teams and brainstorm ideas for cost-cutting. Senators also considered ideas from the public, submitted through a Web site called " Rebooting Government ." Each team was tasked with reporting back five ideas to the full chamber, and a report was put together summarizing each team's recommendations to guide legislative discussions.

The final report claimed to identify at least $689 million in savings. But only a few relatively narrow recommendations made it through the Legislature this session. One of them was to merge the state highway patrol and water patrol. Another was to end printing copies of the state's statutes and manual. More ambitious ideas, including merging the state agencies that govern K-12 and higher education, gained some traction but ultimately failed. A Joint Interim Committee on Reducing the Size of State Government was created in the final days of the session to study the ideas and report back next year. "Each year that it is prolonged, the more necessary these ideas become," says Farrah Fite, communications director for the Senate Majority Caucus.

In Oregon, Governor Ted Kulongoski has convened a "Reset Cabinet" of officials from the public and private sectors to study Oregon's structural deficit. Oregon is set to see budget gaps of at least $2 billion from next year until at least 2019, if the state is to maintain its current level of services. The Reset Cabinet's recommendations are due this Friday (June 25).

Kulongoski hopes the recommendations will help Oregon take a more thoughtful approach to bringing expenditures in line with revenues than has been possible in the current crisis: The need to cut quickly and dramatically has been too pressing. To close a new $577 million budget gap, for example, the governor recently announced his intention to exercise his "allotment authority" to order 9 percent across-the-board cuts for all agencies. The agencies submitted proposals outlining how they will manage the cuts, but the law leaves them little flexibility because cuts must be made equally across all budget categories.

"It's the only tool the governor has to reduce the budget," says Rem Nivens, a spokesman for Kulongoski. "Because of the nature of the request, it's very difficult for agencies to be creative in the reductions."

Layoffs ahead

The result of all the broad-based budget cutting, now in its third consecutive year, is that state governments are shrinking. Nationwide, there are already 48,000 fewer state jobs in state government — excluding teachers — than there were in 2008, according to the National Association of State Budget Officers. In fiscal year 2010, 26 states laid off employees, 22 used furloughs and 12 cut salaries. As revenues continue to lag and federal stimulus funds run out, the tide of personnel measures likely will turn toward layoffs. Those don't require states to continue footing the bill for employee benefits, as furloughs do.

That's what's happening in Washington State, where the government already is in the process of laying off 1,500 employees. Governor Chris Gregoire has said that if additional federal support does not come through, an additional 6,400 employees may have to go. Most of them would come from a single agency, the Department of Social and Health Services, an agency with 19,000 employees. "It's not pretty," says Eva Santos, director of the Washington State Department of Personnel. "The Department of Social and Health Services is going through what will that mean, a worst case scenario."

In California, it was the difficulty of executing layoffs that turned the state toward furloughs as an alternative. It can take from six months to more than a year to execute layoffs in California because of the state's civil service policies. The hope was that using furloughs would be fairer and more palatable to state workers. So even though the state's budget problems are centralized in its general fund — which pays the salaries of only about half of the state's workforce — Governor Arnold Schwarzenegger made very few exceptions to the furloughs. In one sweeping executive order, the governor chopped 14 percent of all affected employees' salaries.

The furloughs are scheduled to end at the end of this month, and agreements reached with four unions include a ban on future furloughs. What will replace them as a cost-saving measure is not clear yet. Alternatives currently being discussed in Sacramento, such as holding thousands of positions vacant, come with their own downsides.

"We've put forward some very stark and severe proposals that weren't on the table in January," says H.D. Palmer, deputy director of the California Department of Finance.